Key Takeaways
- Illiquid REITs not listed on stock exchanges.
- High dividend payouts from diversified real estate.
- Limited share redemption with periodic liquidity.
- SEC-registered with periodic asset appraisals.
What is Non-Traded REIT?
A non-traded REIT is a real estate investment trust registered with the SEC that owns or finances income-producing properties but does not trade on public stock exchanges, making it less liquid than publicly traded REITs. These REITs pool investor capital to acquire diversified real estate assets and distribute at least 90% of taxable income as dividends to qualify for pass-through taxation.
This structure offers investors access to institutional-grade real estate without daily market volatility, differentiating it from publicly listed REITs. Understanding related terms like paid-in capital can clarify how investor funds are allocated within these trusts.
Key Characteristics
Non-traded REITs combine unique features that distinguish them from other investment vehicles:
- Illiquidity: Shares are not traded on exchanges and redemption options are limited, often capped quarterly.
- Regular Dividends: They distribute income frequently, often monthly or quarterly, benefiting income-focused investors.
- Valuation Frequency: Share prices are appraised periodically, reducing daily market fluctuations.
- Regulatory Oversight: SEC registration requires transparency through regular filings and disclosures.
- Tax Treatment: Investors receive Form 1099 for distributions, simplifying tax reporting compared to K-1 forms.
- Entry Barriers: Minimum investments can be modest, making them accessible to retail investors.
How It Works
Investors purchase shares in a non-traded REIT through brokers or advisors during offering periods, pooling capital to purchase real estate assets such as office buildings, multifamily apartments, or warehouses. The REIT generates income from rents, mortgages, or property sales and distributes earnings as dividends.
Unlike publicly traded REITs, share valuation occurs monthly or quarterly based on appraisals, minimizing volatility but limiting liquidity. Redemption programs may allow periodic share repurchases at net asset value (NAV), but these are typically restricted and not guaranteed. Understanding terms like DAC can help you grasp fee structures and deferred costs associated with these investments.
Examples and Use Cases
Non-traded REITs are often employed to provide steady income and diversification in portfolios with exposure to real estate assets not correlated with stocks or bonds.
- Retail and Office Spaces: Some non-traded REITs invest in commercial properties similar to those held by NNN, offering stable lease income.
- Industrial Properties: Investors looking to diversify might consider trusts focusing on warehouses and distribution centers like those in the portfolio of PTY.
- Dividend Income: For income-focused investors, non-traded REITs complement strategies involving monthly dividend stocks covered in best monthly dividend stocks.
Important Considerations
Before investing, consider the illiquidity and higher fees common in non-traded REITs, which can impact your returns and ability to access capital. These investments suit long-term investors comfortable with limited liquidity and periodic valuations.
Additionally, conflicts of interest may arise since external managers earn fees based on acquisitions and asset size. Familiarity with related financial concepts like IAS can enhance your understanding of accounting standards affecting these trusts.
Final Words
Non-traded REITs offer a way to diversify your portfolio with real estate exposure and steady income but come with limited liquidity and potential fees. Evaluate the specific terms and redemption options carefully before committing to ensure it fits your investment horizon and risk tolerance.
Frequently Asked Questions
A Non-Traded REIT is a real estate investment trust registered with the SEC that owns income-producing properties but is not listed on public stock exchanges. It offers an illiquid alternative to publicly traded REITs by pooling investor capital to invest in diversified real estate assets.
Investors buy shares through brokers or financial advisors during an offering period, and the REIT uses the proceeds to purchase real estate assets. Income from rents or sales is then distributed as dividends, typically quarterly or monthly, with share values appraised periodically rather than daily.
Non-Traded REITs offer diversification with lower volatility due to low correlation with stocks and bonds, provide higher income potential through substantial dividend payouts, and have low entry barriers with tax-efficient reporting via Form 1099.
No, Non-Traded REITs are generally illiquid since their shares are not traded on public exchanges. They may offer limited quarterly redemption programs capped at a small percentage of shares, but investors should expect to hold them long term.
Risks include illiquidity, high upfront and ongoing fees, opaque valuations without daily pricing, and the possibility that distributions exceed earnings, which can reduce net asset value and impact returns.
Non-Traded REITs issue Form 1099 for tax reporting, and their distributions may include ordinary income, capital gains, or return of capital. Return of capital reduces the investor's cost basis, deferring taxes until the sale of the investment.
These investments are suitable for long-term investors who can tolerate illiquidity and are seeking diversified real estate exposure with potential for steady income, understanding the associated risks and fees.
